HMRC introduce new VAT penalty and interest rules in 2023

HMRC introduce new VAT penalty and interest rules in 2023

HMRC are introducing a new penalty and interest regime for VAT in 2023. This article explains how the new rules replace the existing VAT default surcharge regime and how the new system will operate. Further guidance is expected from HMRC in early January 2023.

Firstly, it is important to note when these new rules come into force. The changes are due to apply to VAT periods beginning on or after 1 January 2023. The existing default surcharge regime has been criticised over the years for being disproportionate to the length of delay. For example, if an organisation within the 15% penalty band is one day late paying their liability of £100,000 they would receive a penalty of £15,000; the same penalty as if they were weeks or months late in making the payment. The new penalty regime is a points-based system, designed to take into consideration the length of the delay as well as the number of delays over a period of time.

For those currently in the default surcharge regime, there are no transitional arrangements so essentially everyone will start with a “clean slate”. However, HMRC will still seek to collect any surcharges levied under the default surcharge regime. 

Late submission penalties

A point will be given for every missed submission deadline. At a certain threshold of points a penalty of £200 will be charged for that failure and any subsequent failure to submit on time (points will not increase). There will be separate points totals for VAT and ITSA.

The points thresholds are:

In practice this means that a taxpayer filing a quarterly return can miss a submission deadline three times, upon the fourth missed deadline, a £200 penalty will be charged. A further £200 is then charged for any subsequent defaults whilst the taxpayer remains at that penalty threshold.

Penalty points will have a lifetime of two years, after which they will expire. The period is calculated from the month after the month in which the failure occurred, e.g. submission due January 2024, so the penalty point will expire in February 2026.

Once a taxpayer reaches the threshold, all points accrued will be reset to zero when the following conditions are met:

1. a period of compliance
2. the taxpayer has submitted all VAT returns in the previous 2 years (even if late).

The period of compliance is:

Again, this means that a taxpayer on quarterly returns, that have filed any outstanding returns and met submission deadlines in a twelve month period will lose any penalty points accrued.

There will also be time limits after which points cannot be levied:

HMRC can only assess a penalty within two years after the failure giving rise to the penalty and they have the discretion to not apply a penalty in the first place.

Late payment penalties

The new late payment penalty will apply in instances where the return is submitted on time but the payment is not. As mentioned previously, this penalty considers the length of the delay in making payment and the penalty increases over time.

Requesting a time to pay (‘TTP’) arrangement will stop penalties accruing from the date of the request, but only if the arrangement is eventually agreed by HMRC and it is being honoured by the taxpayer.

Please see below a summary of the penalties chargeable for late payment of VAT returns:  

As with the missed submission penalty, HMRC will have the discretion to reduce or not charge a penalty for late payment, including where the taxpayer has a reasonable excuse. HMRC have also announced that a “light touch” approach will be taken in the first year where the taxpayer is doing their best to comply, HMRC will not assess the 2% penalty after 15 days, allowing taxpayer 30 days to approach HMRC (please note that no equivalent “light touch” approach applies to the late submission penalties).

The key point in HMRC’s guidance so far is that they are looking at taxpayers to approach them as early as possible to agree any TTP arrangements if VAT liabilities cannot be paid. The penalties increase the longer the taxpayer delays this.

Late payment interest (LPI)

As part of the new penalty regime, HMRC has updating its Late Payment Interest (LPI) rules to bring these in line with other tax regimes.

LPI will be charged on tax outstanding after the due date, starting from the date the payment was due until is it received by HMRC in full. LPI is calculated as simple interest at a rate of 2.5% above the Bank of England base rate.

Where tax is overpaid, repayment interest will be paid by HMRC on any tax due to be repaid from the later of either:

1. the last day the payment was due to be received
2. the day it was received.

Repayment interest will be paid at the Bank of England base rate less 1% (subject to a 0.5% minimum).

It is important to note that LPI will continue to apply, even where there is a TTP arrangement in place.

In summary

Overall, the new penalty regime appears to be a fairer system than the default surcharge but this remains to be seen in practice. At the heart of the new measures is a penalty based system with late payments or return submissions accruing penalty points that ultimately lead to financial penalties being levied. 

The key points at this stage are:

• submit the return by the due date, even if you cannot afford to pay as this mitigates the late submission penalties
• late submission penalties will reset upon good compliance over a period of time
• where you cannot pay the liability by the due date and you need extra time, contact HMRC at the earliest possible opportunity to agree a TTP arrangement. The longer it takes to do this, the higher the late payment penalty will be.

If you would like to discuss the new penalty regime, please contact Robert Marchant, Hayley Hill or your usual Crowe contact.